IRS Criminal Investigation Special Agents use the specific items method of proving income because it is generally the easiest method of proof that the IRS has in its arsenal to prove unreported income.

IRM 9.5.9.4 states, “Where the government is using the specific item method of proof (in an investigation of alleged tax evasion), the government attempts to document specific transactions that were not completely or accurately reflected on the subject’s income tax return. Additionally, the government must show that the specific omissions of income were made willfully for the purpose of understanding the subject’s income tax liability.”

This is the most direct method of proving unreported income and is the most difficult method for defense counsel to defend against.

IRM 9.5.9.4.1 states, “The type of evasion that allows for the specific item method include: omitted income, fictitious deductions, false exemptions, or false tax credits. There are two approaches to specific items, the basic and aggregate approach and depending upon the facts and circumstances the Special Agent will choose the approach.”

  1. The basic approach to the specific item method of proof requires the Special Agent to trace the reported items of income through the subject’s books and records to the tax return. Upon doing so, the Special Agent can specifically identify the unreported income items.
  2. The aggregate approach to the specific item method of proof simply requires that the Special Agent identify the total amount of income the subject should have reported in any given year. The Special Agent then compares the total amount of income with the aggregate amount of income reported on the return and arrives at an understatement of income.

Case Study:

A taxpayer had been audited by Small Business / Small Employed (SB/SE) in the past. A subsequent audit revealed badges of fraud, which caused SB/SE to become suspicious and refer the taxpayer for investigation by IRS Criminal Investigation (IRS CI). The taxpayer … Read more